Munich Personal RePEc Archive

Sectoral System of Innovation and

Exploring Technological Upgrading

Strategies in Late-Industrializing

Countries

TUNCEL, Cem Okan

Uludağ Univesity

2012

Online at https://mpra.ub.uni-muenchen.de/40843/

MPRA Paper No. 40843, posted 26 Aug 2012 22:11 UTC

Sectoral System of Innovation and Exploring Technological Upgrading Strategies in

Late-Industrializing Countries: A Comparative Study of Automotive Industry

between South Korea and Turkey

Cem Okan TUNCEL Ph.D

Uludag University Faculty of Economics and Administrative Science

Department of Economics Görükle Campus, Bursa, TURKEY

cotuncel@uludag.edu.tr

ABSTRACT Latecomer sectors in late-industrializing economies follow different patterns in their development and growth processes, which largely determine the share acquired from the global value chain. The development and growth process of the sectors is generally argued to be the result of the interaction of macro level specific institutional context and micro level firm strategic choices. In this study I argue that meso-level sectoral systems also play a critical role in the development and growth process of latecomer sectors. Accordingly, I aim to integrate these three theoretical perspectives -resource-based view (RBV) of the firm, sectoral system of innovation (SSI) perspective, and technological capability perspective for late industrializing economies- to explain the relative developmental failure of Turkish automotive industry compared to other successful latecomer industries such as South Korean automotive industry In the light of theoretical framework, I will try to investigate sectoral technological upgrading trajectory and compare between Korean and Turkish automotive industry development path by using case study method. I will end by discussing how a multilevel framework that takes into account the systemic factors can guide research on sectoral development in late-industrializing countries. In the light of a comparative historical analysis of development of Turkish and Korean automotive industries it is argued that a pace of industrial transformation can be accelerated by multilevel proactive state intervention. Keywords: Sectoral System of Innovation, Upgrading Strategies, Late-Industrializing Countries, Korean

and Turkish Automotive Industry

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1. Introduction: While Asian newly industrialized Economies (NIEs) were similar to the other developing

countries in the sense that they were all late-industrializing countries in the global economy

(Hikino and Amsden, 1994, Wong, 1999) some sectors in these economies, such as South

Korean automotive industry, exemplify a success story while others, such as Turkish automotive

industry, encounter developmental failures (Erdoğdu,1999). The literature on performance of

different latecomer sectors in late-industrializing economies suggests that they follow different

patterns in their technological catch-up processes (e.g., Lee and Lim, 2001). Explanations of this

performance heterogeneity between sectors generally focus on the interaction of macro level

specific institutional context and micro level firm strategic choices (Hobday, 2003). A quick

overview of the literature, however, reveals a surprising lack of an integrative approach that takes

into account not only macro and micro level perspectives but also meso-level sectoral systems

approach. In this study I argue that meso-level sectoral systems also play a critical role in the

development and growth processes of latecomer sectors. Therefore, an integrative framework

that takes into account the meso-level sectoral systems is needed to provide a more

comprehensive explanation of sector level performance heterogeneity. Accordingly, I aim to

integrate three theoretical perspectives, resource-based view (RBV) of the firm, sectoral system

of innovation (SSI) perspective, and research on institutional context for technological capability

development for late industrializing economies, to explain the performance heterogeneity of

latecomer sectors. Specifically, this paper focus on the Turkish automotive industry and aim to

understand and explain the developmental failure it encounters compared to other successful

latecomer industries, such as South Korean automotive industry. In this study the path dependent

sectoral evolution and lock-in dynamics of Turkish automotive industry will be investigated

(David, 1985; Arthur, 1990) by focusing on the local and global linkages, organizational learning

and capabilities, interaction among actors, success and failure examples, external and internal

knowledge sources, and the roles of new actors.

The foundation of the automotive industry in South Korea and Turkey has started almost in the

same period, early 1960s. Progress of this industry in Turkey outdistanced the domestic Korean

performance until the second half of 1970s. Since then, thanks to flourishing industrial policies

implemented by the state, the Korean automotive industry entered in a booming growth, and

turned out to be a prominent industry capable of producing and marketing to every corner of the

globe its own global brand today. On the other hand, the industry in Turkey remained localized

as a production base developing in parallel to the strategic decisions of global brands,

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culminating in the lack of a global automotive industry capable of manufacturing its own brand.

Automotive industries of these two countries inaugurated at similar initial conditions followed

utterly different paths and scored distinct performances. This study is aimed at exploring the

causes underlying these distinct outcomes reached by two late industrialization experiences by

means of a multilevel theoretical framework. Root causes of these two discrete performances are

believed to be the governmental incentive policies towards industry at macro level, the skills of

the late comer firm to exercise its dynamic skills and take strategic decisions at micro level as

well as selective policies decisive in technological development routes at meso level.

This study consists of main three parts. In first section multilevel theoretical framework

technological upgrading process are investigated. Second section is dedicated to comparative

analysis of S Korean and Turkish automotive industries. In this section causes of differences

between two countries’ automotive industry performance are explored via using historical data.

In the third section an assessment has been made on Korean and Turkish automotive industry

from SSI perspective and main propositions for conclusion are discussed. Finally fundamental

characteristics feature of policy space and upgrading relation summarize in conclusion section.

2. Multilevel Analysis of Technological Upgrading in Late-Industrializing Context:

In the 1990s a large body of research studying the catching up processes of newly

industrializing Asian countries emerged. These studies particularly focus on the dynamics of firm

level learning processes (Kim, 1999; Mathews and Cho, 1999), technological capability building

(Lall, 1992; Lall, 2000; Lall and Teubal, 1998) and national institutional contexts defined as

national innovation systems (Freeman, 1987; Shin, 1996). These studies were followed by others

that adopt a sectoral system of Innovation approach. Most of these SSI studies focus on the

specialized supplier and science based sectors, such as telecommunication equipment and

services, software, biotechnology and pharmaceutical, petrochemical, and complex machine tool

production, electronics, and automation (For EU countries as advanced economies see: Tether

and Metcalfe, 2010; on service; Mckelvey et al.,2004; on pharmaceutical, Cesaroni et al. ,2004;

on chemical, Steinmueller,2004; on software, Edquist,2004; on Telecommunications, Wengel

and Shapira, 2004 on machine tools ; for China as a latecomer economies see: ; Xi et al.,2010

on automobile; Li and Xin Pu on colour TV, 2010). While this growing literature have helped us

understand the dynamics of development and performance in the late-industrializing economies,

an integrative approach that integrates macro, micro and meso-level perspectives to explain the

sectoral level performance heterogeneity is lacking. Accordingly, I draw on the resource-based

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view (RBV) of the firm, sectoral system of innovation (SSI) perspective, and research on

institutional context for technological capability development for late industrializing economies

to explain the sectoral level performance heterogeneity (The theoretical framework is illustrated

in Figure 1).

Figure 1: Multilevel Theoretical Framework Technological Upgrading

Source: author

2.1. Late Industrialization:

The macro level perspective in the theoretical framework focuses on the late-

industrialization problems. The concept "late industrialization" was formulated by Gerschenkron,

the US economist of Russian origin. Countries like Russia and Germany outdistanced by

industrializing countries such as UK and France upon the start and growth of the industrial

revolution, and therefore referring to state intervention in an aim to catch up with these

prosperous countries are defined as late industrializing countries by Gerschenkron (Keyder,

1978). According to Gerschenkron, industrialization evident in UK can be achieved in backward

countries only through the existence of some substitution factors. These factors are banks in

Germany and principally the government in Russia. (Gerschenkron, 1962). Approaches that may

be postulated as second-generation late industrialization theses focus on thriving industrialization

processes of Asian countries, primarily Japan, which are called the Asian Miracle (e.g.

Worldbank, 1993). Carrying a centric role in early late industrialization debates, the state

Firm

Global Value Chain

National Economy

Sector/Industry

Global Production System Structure of Global Value Chain

& Governance

Macro Level:

Technological Capability Approach

Technology Policy Institutional Context

Meso Level: Sectoral System of Innovation

and Sector Specific Technology Policy

Micro Level: Recourse-based

Approach Dynamic Capabilities

Policy interface between firm level

and macro level

Technological Upgrading

GVC Governance Typologies &

Sector Specific Policy

Firm’s Strategic Choices

& Latecomer Strategies

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preserves its pivotal essence in these new generation discussions (Fagerberg and Godinho,

2006:518). For instance, stressing the significance of the capitalist developmental state in

Japanese industrialization, Chalmers (1982) argues that the strategic industrial policies

effectively pursued by the state constitute the crucial component of this successful late

industrialization process. Debates surrounding this Asian development lay the major emphasis

on the state's capacity of administrative skills in the industrialization process. And the constituent

of this capacity is the state power, the existence of relatively autonomous specialist bureaucracy,

and strong cooperation towards strategic objectives between the business world and private

sector. This cooperation is what has allowed the implementation of effective industrial policies.

Late industrialization theory focusing on “technological capability” has been

conceptualized in the early 1980s (Bell and Pavitt, 1995; Enos 1991; Fransman, 1985; Lall, 1992,

2000). The term "technological capabilities" encompasses the wide range of knowledge and

skills required to acquire, assimilate, utilize, adapt, change and create technology (Lall, 1992).

These capabilities require a national institutional context that provides certain complementary

inputs including “organisational flexibility, finance, quality of human resources, support services

and information management and co-ordination competence” (Juma and Clark, 2002:8). The

industrial policy is studied across a dichotomous approach, namely "functional" and "selective or

sector-oriented" interventions. The functional policy set is aimed at eliminating market failures in

no favour of a selected sector or business. Unlike the functional policy, the structuralist policy

involves targeting specific sectors or activities by means of various policy instruments such as

subventions, trade policies, R&D subsidies, etc. (Lall and Teubal, 199) Furthermore, the

structuralist policy underlines the necessity to effect both functional and selective interventions

for industrial development, and adopts selective interventions as its priority policy set.

Consequently, the main process of technological change in late-industrializing countries is

performed by acquiring and improving technological capabilities via particularly selective

technological policies (Teubal, 2002). The success of strategic and elective industrial policies is

underpinned at state freedom from the pressure of interest groups, and collaboration between

state and private sector across common goals. The critical factor in these country experiences has

been the state's ability to restrict the "market rationale", considered to be the fundamental

resource allocation mechanism of neoclassical economics, in line with long-term priorities of

industrialization based on the strategic vision of the state (Öniş, 1991). The traditional

neoclassical economics custom has a critical approach to the interventionist state pattern, and

stresses issues with this intervention including misallocation and productivity losses. Therefore,

according to this approach, the core duty of the state in developing countries should be to set up

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proper prices that would allow economic actors to act along true stimuli. However, as indicated

in Amsden (1993), the state has routed the distribution of resources in these newly industrializing

countries and intervened in relative prices by applying distinct incentives with a view to boosting

investments and foreign trade, culminating in the formation of wrong prices. The decisive

characteristic of newly industrializing Asian countries has been the behaviour avoiding entrusting

resource allocation to the market mechanism as posited by neoclassical economics. One of the

key factors of accomplished policies pursued in Eastern Asia has been the attempt to close the

knowledge gap. These countries have not only resolved the issue of capital shortage but also

staged conscious endeavours with the aim of employing modern technologies in production

processes in awareness of current knowledge gaps between developed countries (Stiglitz,

1986:297). The companies tended to internalize foreign technologies transferred instead of

directly employing them. Such technological learning process has constituted the foundation of

technological skill base.

Finally, what underlie the success of late industrialization experiences observed outside

Europe in twenty first century is strategic industrial policies based upon state and private sector

collaboration. On the other hand, Asian economies have scored major growth achievements by

implementing comprehensive industrial policies deviating from standard liberal policies besides

these general principles (Rodrik, 2009). Indeed, similar policies were also practiced in Latin

American countries in the import substitution period. However, the major difference between

Eastern Asia and Latin America is not anything caused by industrial transformation led by state

in one, and by the market in the other. The actual reason is that industrial policies formulated in

Latin America are not as serious and interrelated as the policies in Eastern Asia, culminating in a

poorly entrenched transformation in Latin America unlike Eastern Asia (Rodrik, 2009). East

Asian countries attached major importance to setting vision on economic progress and targets in

collaboration with private sector. Rather than a detailed planning based on state control, these

countries have built development schemes with state acting as a catalyst (Stiglitz, 2010:302).

Therefore, while the state is administering the industrialization process, it should pursue a

strategy where private sector actors are strictly involved in the decision-making process. Such

involvement process has offered opportunities to public and private sector in setting objectives

and selecting the instruments to be employed to attain these objectives.

2.2. Latecomer Firm and Technological Upgrading Strategies:

The micro level analysis in my framework focuses on firms in latecomer economies. At

the micro level resource-based view of the firm provides the analytical tools for analyzing

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latecomer firm behavior (Mathews, 2002). Classical RBV theory was developed by Penrose

(1959) almost half a century ago. She assumes that firms compete on the basis of internal

“resources” that takes time to develop (Penrose, 1959). More recent contributions of RBV theory

of the firm came from Barney (1986, 1991), Dierickx and Cool (1989), and Peteraf (1993). These

studies assume that each firm is a collection of key resources and capabilities that determine a

firm’s strategy. Recent research in the RBV focuses on the dynamic aspects of capabilities

(Kogut and Zander, 1992; Teece et al., 1997; Eisenhardt and Martin, 2000). Dynamic capabilities

are conceptualized as firm’s ability to build and/or extend basic capabilities in order to deal with

changing environments (Teece et al., 1997). These firms are argued to be affected by the

institutional context of their national economies and global producing networks and they effect

the environment in which they operate.

The enterprises of countries in late industrialization process consequentially seem to be the

latecomer firms of the global economy. Firms coming late due to historical conditions face

significant restrictions in accessing different sources and technology in early period of

articulation with global economy. These restrictions limit the access of these firms to foreign

marketplaces. These firms strive to benefit from advantages such as low labour cost during initial

periods with a view to catching up with leading companies and turning out to be a global trader.

Therefore, latecomer firms have some advantages and disadvantages at the start up those leading

and mature enterprises of current industry do not normally suffer. Opportunities that early comer

firms have such as customer loyalty, scale advantages inducing learning effect, and smooth

access to technology and strategic inputs constitute disadvantages for latecomer firms. In

addition, remoteness to consumer markets with high level of income particularly in developed

countries and to technology sources produced by various organizations (universities, research

institutions, etc.), and the paucity of resources that the host country can allocate to infrastructure

represent other major disadvantages. On the other hand, in addition to these disadvantages that

latecomer firms suffer, they enjoy certain advantages brought by making late appearance in the

industry. Of them, low switching costs that a latecomer firm has contrary to mature enterprises

represent the foremost one. Economic life sees a rapidly changing set of tastes, preferences and

production processes (Cho et.al., 1998). Mature companies cannot smoothly demonstrate skills of

adaptation to environment during the whole rapid environmental transformation due to the

process which the economics tradition calls "routinised behaviours" (e.g. Nelson and Winter,

1982). This situation offers advantages to latecomer firms for adaptation to new conditions.

Additionally, latecomer firms have the opportunity to benefit from the knowledge externality and

experiences of leading enterprises. In particular, mistakes committed by leading companies

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during the early period constitute a knowledge source for latecomer firms without any cost

burden. In addition, low-cost input sources available for newcomer firms constitute another

major advantage (Cho et.al., 1998). As a result, latecomer firms make their appearance in the

industry as accompanied with both disadvantages and some advantages (. For latecomer firms to

catch up with leading enterprises of the industry, these firms should both cope with

disadvantages associated with late coming and make good use of available advantages. Firms

capable of successfully employing their dynamic skills and resources in hand catch up with

leading enterprises and have the opportunity of technological upgrade. The major decisive factor

in such technological upgrading process is to build up the technological skill based on learning

process.

Decision on strategic decisions of latecomer firms for technological upgrading are the

conditions surrounding the national economy in which these firms are involved as well as the

global value chain composition of the industry concerned and the industry's technological regime

characteristics. For its distinctive aspects, each industry presents separate technological

upgrading paths for firms. On the other hand, states have the opportunity to manage the

technological upgrading process along these paths through available selective policy instruments.

The catching-up process displays a character dependent upon the path determined by historical

facts and corporate relationships rather than being a linear and unidirectional route. However, by

making good use of opportunities offered by national and industrial characteristics available to

them in their operational domain, firms may pursue distinctive catching-up strategies.

Achievements scored by latecomer firms in global marketplaces have been discussed

particularly within the context of Asian countries. Whether these catching-up strategies involve

certain typologies or not is being explored. Analyses aimed at classifying these typologies are

carried out on firm scale at micro level. However, since these classifications focus both on the

characteristics of industries and the role of public policies during this upgrading process, they put

into play the meso- and macro-level as well. To this end, Hobday (1995) developed a tripartite

technological upgrading typology upon his researches on the Korean electronic industry. In this

typology, firms go through three different phases, enhance the technological skills they gain at

each phase and turn out to be pioneering players in the global marketplace. At the first phase,

“Original Equipment Manufacturing (OEM)”, firms start by undertaking contact manufacturing

or contracted installation jobs for the major buyer within an environment where detailed

properties of the product design are provided. The second phase attained by the firms is defined

as “Original Design Manufacturing (ODM)”. At this phase, firms enhance their product design

capabilities in parallel to the skill growth introduced by learning dynamics, and upgrade to the

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phase of design customization according to product specifications provided by buyer firms. The

final phase is “Original Brand Manufacturing (OBM)” where the firm appears in global

marketplaces with its own brand. Own brand development is the last step of the technological

upgrading process. Thanks to the technological capabilities gained, firms initially standing as

merely manufacturers become capable of producing under their own brands and entrust

manufacturing jobs with low added value to their suppliers.

Wong (1999) criticized Hobday's typology for it generalizes the transformation in the

electronics industry and suggests the process of manufacturing the own brand as a common final

objective for all firms. Wong developed five different technological upgrading typologies

predicated on the source-based firm approach arguing that firms can enter distinctive growth

processes by mobilizing their specific sources (Wong, 1999:6-10).

1. Reverse Value Chain Strategy:

The tripartite technological upgrading model developed by Hobday constitutes the first

typology of Wong's approach. Namely, firms evolve from the OEM phase to the OBM phase.

2. Reverse Product Life Cycle Strategy:

In this strategy that is a major type of the reverse value chain model, the latecomer firm may

turn out to be a fast follower in the product market, close the gap between and even exceed the

leading firm. Latecomer firms start with manufacturing mature products by either acquiring

technology license or learning processes through mimicking. Initial products of these firms are

those not containing state-of-the-art technologies and generally targeting low-opportunity market

segments. Such sort of a market penetration strategy gives the firms the opportunity to preserve

low-cost manufacturing advantages against the pioneer. With the development of mature

products and process technologies, firms seek ways to manufacture more technology-intensive

products. As a result of following the development path of the technologically pioneer firm

through highly-concentrated learning processes and mimicking its R&D operations, the firms

start to close the technological gap between the pioneer firm. For this upgrading process to come

up with success, unlike the reverse value chain model, the firm has to develop its product and

process technologies simultaneously. The Japanese and Korean automotive and

telecommunications industry may be suggested as an example to such kind of an upgrading

strategy.

3. Process Technology Pioneering Strategy:

So as to avoid the risks caused by investments for product development, branding and

marketing to be made with the aim of producing their own brands, the firms may specialize in

production processes and adopt only the specialized producer status. The firms may turn out to

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be specialized producers by means of acquiring the latest process technologies and employing

these capabilities in production processes such that the best performance demanded by the

market is demonstrated instead of allocating resources to product development technologies.

Firms need process R&D efforts to become technology pioneers. Best example to this strategy is

the production-specialized electronic suppliers active in Singapore.

4) Product Technology Pioneering:

In developing countries, most of the firms tend to avert from a process as tough as developing

product technologies. This strategy is characterized with the common behaviour of the firms to

endeavour to outdistance each other through the products they develop thanks to radical product

innovations, or to enhance their existing products across progressive innovations.

5) Application Pioneering Strategy:

In this strategy, firms head towards technological upgrading through adapting current

technologies to new areas instead of acting in new product areas.

Figure 2: Generic Technological Capability Development Strategies of Latecomer Firms from Late Industrializing Economies

Sourse: Wong, 1999:30

Such distinctive development strategies may display transitions throughout the process. The

thriving latecomer firms of East Asia have implemented the policy sets of different strategies at

different times. While some firms switch to a strategy from one another in the course of time,

Process Technology Capability

Product Technology Capability

High

High

Low

4. Product Technology Pioneering Strategy

5. Application Pioneering Strategy

2. Reverse Product Life Cycle Strategy

1. Reverse Value Chain Strategy

3. Process Technology Pioneering Strategy

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most prefer pursuing the same strategy in the long-term. Implementing different strategies as a

whole would provide mutual benefits due to the relationships of complementarities. Clustering of

the firms capable of demonstrating technological upgrading of a country in a certain industrial

line, and enhanced position of that country's firms in the global value chain may be described as

the occurrence of technological upgrading at industrial level. For instance, technological

upgrading achieved by certain Korean firms such as LG and Samsung in the electronics industry

trigger the technological upgrading of the Korean electronics industry as a whole. While this

industry turns out to be one of the major sectors of the country in terms of value added generated

and employment export income, decisive standing of domestic firms in global value chain also

makes it possible for the Korean state's decisions for supporting these firms as a whole to act on

the governance composition of the value chain.

2.3. Sectoral System of Innovation and Technological Upgrading from Late-Industrializing

Perspective:

Sectoral System of Innovation approach provides theoretical background for meso-level

conceptualization for technological upgrading. Some studies in the literature adopt a perspective

that focuses on the relationship between “sectoral specificities” and “value chain governance”

while analyzing upgrading (Humphrey and Schmitz, 2000). A SIS is a set of new and established

products for specific uses and the set of agents carrying out market and non-market interactions

for the creation, production and sale of those products. “A sectoral system has a knowledge base,

technologies, inputs and an existing, emergent and potential demand” (Malerba, 2004: 16). The

SIS approach contributes to the crucial idea that regarding all technological or sectoral systems

as homogenous is not true. In SIS perspective, the conditions for innovations; one industry in one

country has much more in common with the same industry in another country than with another

industry in its own country. Moreover, SIS approach suggests that different industries may not

have only different competitive advantages, interactive and organizational boundaries but also

different sources of innovation and users’ needs (Chang and Chen, 2004: 22).

As a result, it is claimed that there are two starting points about industrial sectors (Malerba,

2002):

1. Sectors are characterized by specific knowledge bases, technologies, production

processes, complementariness, and demand by a population of heterogeneous firms and

non-firm organizations and by institutions.

2. Sectors greatly differ from each other in several of these dimensions.

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All innovation systems have building blocks. Sectoral innovation system is composed of three

main building blocks (Malerba 2004:10-12):

a. Knowledge and technological domain

b. Actors and networks

c. Institutions

a. Knowledge and technological domain:

Any sector or industry could be characterized by a specific knowledge base, technologies and

inputs. All of them shape the dynamics of a SSI and its spatial boundaries s defined as a

technological regime (Breschi and Malerba, 1997: 132).It is composed by the opportunity

conditions (likelihood for innovations), the appropriability conditions (possibilities of protecting

innovations), the cumulativeness of technological knowledge (relation between today’s and

future innovation in specific sectors and along technological trajectories) and the relevant

knowledge base. The latter relate the nature of the knowledge leading innovation at firm level. It

involves various degree of specificity, tacitness, complexity. Each sector operates under a

different regime. In respect to spatial aspects they emphasize the geographical concentration of

innovators and their ‘knowledge spatial boundaries’, the search space for relevant knowledge that

firms require for their innovation process Technological which regime is the main determinant of

sectoral pattern of innovation coming from Schumpeterian tradition .Schumpeterian legacy focus

on differences market structures and innovation dynamics among industries (It summarize in

Table 1). Technological regime can be divided into two main types as Schumpeter Mark I and

Schumpeter Mark II. Schumpeter Mark I is characterized by “creative destruction” with

technological ease of entry and a fundamental role played by entrepreneurs and new firms in

innovative activities. Schumpeter Mark II is instead characterized by “creative accumulation”

with the prevalence of large established firms and the presence of relevant barriers to entry to

new innovators (Breschi, et al, 2000:388).

b. Actors and networks.

A sector is composed of heterogeneous agents that are organisations and individuals (e.g.

consumers, entrepreneurs, scientists). Organisations may be firms (e.g. users, producers and input

suppliers) and non-firm organisations (e.g. universities, financial institutions, government

agencies, trade-unions, or technical associations), including sub-units of larger organisations (e.g.

R-D or production departments) and groups of organizations (e.g. industry associations)

(Malerba,2006).

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Table 1: Schumpeterian Modes of Technological Regimes

Schumpeter Mark I Creative Destruction

Schumpeter Mark II Creative Accumulation

Fundamental Factors of

Technological Regimes

High opportunity conditions

Low appropriability conditions

Low Cumulativeness (Firm level ) Knowledge base (specific, codified,

simple)

High opportunity conditions

High appropriability conditions

High Cumulativeness (Firm level )

Knowledge base (generic. tacit, complex)

Main Features

of Industry

Low concentration of innovative activities

Many innovators

Highly turbulent population of innovators

Many SMEs

High entry to industry

Low concentration of capital High instability in the hierarchy of

innovator

High concentration of innovative activities

Few innovators

Rather stable population of innovators

Large scale firms

entry barriers to industry

High concentration of capital Stability in the hierarchy of innovator

Source of

Technological Change

Entrepreneur-based technological

change

Routinized technological change,

Examples

Machine Tool

Fabricated Metal Products Industry

Furniture Manufacturing Industry

Textile and Apparel Industry

Chemical Industry

Automotive Industry

Electric Machine Industry

Root

Literature

Schumpeter (1912) ; Schumpeter (1928)

Schumpeter (1942)

Source: Prepared from Breshi and Malerba 1997, Malerba and Orsenigo 1995, Audretsch 1997

c. Institutions:

Institutions are defined by North (1991) as “the humanly devised constraints that structure

human interactions”. They involve formal constraints (e.g rules, laws, and constitutions),

informal constraints (e.g norms of behavior, conventions, self –imposed codes of conduct) and

their enforcement characteristics”. (North, 1994: 360). Institutions have important affects on

economic performance through history. Three sets of institutions are defined in SSI) .Institutions

deal with the provision of the basic good use in innovation activities namely scientific and

technological knowledge ( The System of Intellectual Property Rights) and organize the

financing of innovations and corporate governance mechanisms in innovations (Financial market

or banks) finally it concern with the provision of human resources and the ways that can be used

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in different industrial relation systems (Labour market regulations, Education system). (Coriat

and Weinstein 2004: 332)

These building blocks approach draw broad framework for understanding sectoral development

dynamics which would aid policy formulation from economic development perspective. The

most important conclusion of his approach emphasizes on the need for sector-specific technology

policies which should aim to build SSI in selective industries. SSI as a development strategy

provides various policy tools for increasing innovation capacity at sectoral level. In sum, because

of technological spillover, SSI especially in science-based sectors, accelerates not only sectoral

performance but also whole economic performance.

As a result, different industries have different technological regimes and sources of

innovation. For this reason, designing sector specific policies is required. These sector specific

policies are also influential on upgrading Global Value Chain. GVC based analysis provides an

analytical framework which heeds to the structure and power relations within a network of firms

involved in the development, production and marketing of a product(s) created in a global

production system (Gereffi and Korzeniewicz 1994; Gereffi, 1994; 1999; 2003; Gereffi et

al.2005).“The value chain theory of governance suggests that relationships between leading

firms and suppliers differ across sectors due to the particular characteristics of the production

processes and the organization of the sector, such as the sophistication and availability of the

technology involved, the existence or absence of (technical and process) standards, and the

extent to which rapid turnaround time or speed to market is essential to competitiveness” (Bair,

2005: 163). The goal is to explain variation across sectors in terms of how global production is

organized and managed and how firms improve their technological level. In this framework,

technological upgrading of late-comer firm is achieved through learning dynamics and

technological capability building. This global business environment provides context for firms in

which they can make technological upgrading in global value chain by using dynamic

capabilities. Gereffi et al. (2005) attempted to develop a typology of five governance structures

that describe the network relationships linking suppliers in global industries to lead firms. This

typology is based on the possible combinations resulting from variations (measured as ‘low’ or

‘high’) in three independent variables: the complexity of transactions, the codifiability of

information and the capability of suppliers. The value chain theory of governance suggests that

relationships between leading firms and suppliers differ across sectors due to the particular

characteristics of the production processes and the organization of the sector, such as the

sophistication and availability of the technology involved, the existence or absence of (technical

and process) standards, and the extent to which rapid turnaround time or speed to market is

14

essential to competitiveness. The goal is to explain variation across sectors in terms of how

global production is organized and managed and how firms improve their technological level

(Bair, 2005: 163).

GVC framework, in addition, is fruitful for the crafting of effective policy tools concerning

industrial upgrading. The concept of upgrading—making better products, making them more

efficiently, or moving into more skilled activities—has often been used in studies on

competitiveness (Kaplinsky and Morris, 2001; Porter, 1990).Following this approach,

upgrading is decisively related to innovation. So upgrading is defined as innovating to increase

value added. Enterprises achieve this in various ways, such as, for example, by entering higher

unit value market niches or new sectors, or through undertaking new productive functions. The

concept of upgrading may be effectively described for enterprises working within a value chain,

where four types of upgrading are singled out (Humphrey and Schmitz, 2000):

Process upgrading is transformation of inputs into outputs more efficiently by reorganizing

the production system or introducing superior technology (Schmitz, 1999).

Product upgrading is moving into more sophisticated product lines in terms of increased

unit values (Gereffi, 1999).

Functional upgrading is acquiring new, superior functions in the chain, such as design or

marketing or abandoning existing low-value added functions to focus on higher value

added activities (Bair and Gereffi, 2001).

Intersectoral upgrading is applying the competence acquired in a particular function to

move into a new sector. ( Humphrey and Schmitz, 2002).

4. A Comparative Analysis of Automotive Industry between Korea and Turkey:

4.1. The South Korean Automotive Industry: Development and Current Situation

Today, the Korean economy stands out with its taskforce functioning as research and

development-oriented and its highly sophisticated industrial infrastructure in plenty of fields

ranging from textile to chemistry, from heavy industry to IT technologies (Chung, 2003). While

standing as a basically underdeveloped country in late 1950s, Korea today displays the position

of a country manufacturing state-of-the-art products to every corner of the world through a

thriving growth strategy. The review of Korea's economical development process reveals three

major factors underlying this achievement. These are the state's inarguable role in shaping the

15

business world, the finance system under stringent control of banks, and the monopoly created by

prominent family enterprises called cheabol1 (Hahm, 2003:79).

The Korean2 state intervened in resource distribution through industrial and technological

policies it pursued. Investment schemes developed through state coordination determined the

priorities of long-term development plans. All incentives extended by the state to the private

sector were tied to distinctive performance criteria, and state consistently transferred data to the

private sector through the technical competence framework it has. Such kind of competence

exchange has allowed efficient data transfer through social networks built between the private

sector and public institutions. The state made available to chaebols both its financial resources

and loans acquired from the abroad through state banks at interest rates that are much favourable

compared to the free market. Consistently receiving incentives through various mechanisms,

chaebols started to control the Korean economy. Chaebols became the driving motive for

industrialization in labour-intensive sectors particularly during the initial phases of the

industrialization process. And Korean state supported the set-up of Cheaobol-type enterprise

organizations for the sake of ensuring rapid economical development. Such kind of enterprises

attract the best trained and qualified human source, and enjoy major advantages in technology

transfer, assimilation of the technology transferred, and financing. In addition, as Cheabols

incorporate several subsidiaries, they could avail of cross-financing opportunities by reflecting a

particular profit derived through a subsidiary involved in a sector into another sector for

investment purposes (Won-Young, 2000).

Thanks to the organizational, technical and financial sources they have, these giants assumed

critical roles in the international expansion process of the Korean economy.

The development quest of Korea displayed an evolution from imitation to innovation.

Throughout its development process where we initially see efforts for imitating products in

developed countries, Korea proceeded with putting forward an authentic model without

dependency to foreign investors, and prioritizing the learning of technology (Mathews, 1999).

Methods including endeavours to figure out the technology product, workbenches and machines

through reverse engineering were also employed in technology development. Local research and

development initiatives played a decisive role in enhancing the technological know-how acquired 1 The chaebol are the large, conglomerate family-controlled firms of South Korea characterized by strong ties with government agencies. The chaebol means “business association” in Korean language. There were family-owned enterprises in Korea in the period before 1961 but the particular state-corporate alliance came into being with the regime of Park Chung Hee (1961-1979). Park modeled this arrangement on the zaibatsu system which developed in Japan during the Meiji Era. There were significant differences between the zaibatsu and the chaebol, the most significant of which was the source of capital. The zaibatsu were organized around a bank for their source of capital. The chaebol in contrast were prohibited from owning a bank.

16

during the early period. Particularly throughout the process to date since 1980s, both the

noteworthy rise in R&D expenditures and rapid switch to advanced technological products

yielding high value added in both production and export buttressed these developments in the

R&D system (Hobday et. al., 2004).

Table 2: The Current Status of Auto Manufacturers in Korea (2010)

* Daewoo Motors ( established in 1972) was bought by General Motors Corporation in 2002 and the company was renamed GM Daewoo. GM Daewoo renamed itself to GM Korea in 2011, all GM Daewoo products are sold in South Korea as Chevrolets. **Samsung (1998) sold a seventy percent stake in the company to Renault in September 2000, and the company was renamed Renault Samsung Motors Source: Korea Automobile Manufacturers Association (KAMA), 2011 Korea's Automotive Industry

The automotive industry has a special standing in this highly-accomplished industrialization

experience of Korea. After USA, Europe and Japan which one can depict as the prominent base

of the automotive industry, Korea is the first country to build up an automotive industry staging a

Hyundai Kia GM Korea* Ssangyong

Motor Renault

Samsung** The year of foundation 1967 1944 2002 1954 2000

Initial License for Production

-- Ford&Mazda Honda Mercedes-Benz Nissan

Location Ulsan, Jeonju, Asan

Gwangmyeong, Hwaseong, Gwangju

Gunsan, Changwon, Bupyeong

Pyeongtaek, Changwon Busan

No. of employees 56,482 32,599 17,030 4,698 7,582

Types of vehicles produced

Passenger cars, SUV, CDV,

buses, trucks, CSVs

Passenger cars, SUV, CDV,

buses, trucks, CSVs

Passenger cars, CDV,buses,

trucks

Passenger cars, SUV

Passenger cars, SUV

Sales (KRW billion) 36,769 23,261 12,597 2,070 5,168

Net income (KRW billion) 5,267 2,254 586 8 36

Production capacity(Korea,

1,000 units) 1,858 1,580 915 110 30

Production (1,000 units) 1,743 1,417 744 80 275

Domestic demand (1,000

units) 660 485 126 32 156

Exports (1,000 units) 1,073 920 611 48 116

Overseas factories

China, India, Turkey USA,

Czech Republic

China, Slovakia, USA - - -

17

global brand. Through policy sets based upon the internalization of learning processes and

targeting the development of technology, South Korea has turned out to be a global manufacturer

in the automotive industry (Kim, 1998). Current progress attained by Korea in the global

automotive market pushed the country to the fifth rank after China, USA, Japan and Germany in

the classification of prominent global manufacturers with a manufacturing capacity of 4,657,094

vehicles as at 2011. The biggest automotive giant of Korea, Hyundai-KIA is ranked fourth after

Toyota, GM and Volkswagen among biggest automotive enterprises of the world with a total

manufacturing capacity of 5,764,918 vehicles as at 2010 (OICA,2011). The Korean automotive

industry owes this achievement to an industrial development plan well managed by the state from

the very beginning.

In the Korean automotive industry, the first prominent step was taken when the Five-Year Plan

for the Car Industry was elaborated in 1962. So as to support this plan, the state enacted the Car

Industry Conservation Law on the same year. The plan introduced rules as to penetration into the

automotive sector, car and spare part quality, regulation of production costs, prohibition of car

imports and duty-free imports of replacement parts not domestically manufactured. Furthermore,

the state imposed the rule requiring majority share of domestic manufacturers for car assembly,

and paved the way for the foundation of the Korean Car Manufacturers Society. The maiden car

assembly plant was put into play under technical collaboration with Japan's Nissan, and started

production in 1962. The state selected one manufacturer for the manufacturing of each of low

and medium-volume car segments and diesel engines.

The “Car Industry Development Plan” was proclaimed in 1964. Regulations proposed in the

plan included associating spare part manufacturers with a single assembler, state subsidies for

spare part manufacturers, and requirement for the domestic demand to be met by a single

assembler. In 1966, the domestic contribution tariff was elaborated, and incentives were

associated with domestic contribution rates. In 1967, the assembler monopoly was liquidated,

and other firms were also allowed to set up assembly lines. However, the requirement ruling that

firms should be linked with developed countries to set up an assembly line was imposed. Same

year, foundation of Hyundai Motor Company was permitted subject to the requirement of setting

up a car plant under cooperation with Ford. In 1969, the "Master Subsidy Plan for the Car

Industry" was proclaimed. The plan suggested the set-up of a motor plant, car body construction,

manufacturing of spare parts fully by domestic producers, and development of a single car

model. In the plan, estimated schedule of fully domestic manufacturing would be 1972 for small

cars, and 1974 for standard cars (Green, 1992).

18

When efforts for collaboration with foreign firms failed, Hyundai, commissioned with the

mission to upgrade the automotive sector, decided to develop its own model in 1973, and

transferred technology from Japan's Mitsubishi for manufacturing 1,2 l engines. The "Long-Term

Car Industry Plan" was adopted. The plan was suggesting a domestic contributory share of more

than 90% in late 1970s, and the rise of a pioneering export industry in early 1980s. Passenger car

manufacture was limited to three companies. Import of parts that can be domestically

manufactured at a satisfactory level of quality was banned. Through technologies transferred

from Japan, UK and Italy, Hyundai succeeded to manufacture the maiden Korean car, Pony, in

1976. Korea started to export cars below cost due to market failure. Late 1970s saw the export of

Pony cars to a vast global network of 46 countries primarily represented by developing countries.

Starting with the second half of 1980s, Hyundai, developing its design technology in Excel,

succeeded to market Accent, its own model, to the whole world under the affordable car

segment. 1980s saw the globalization of the Korean automotive industry (Kim, 1998).

Table 3: Spiral Process of Organizational Learning In Catching-up a Hyundai Motor

Source: Kim, 1998:514

In 1986, Japan introduced voluntary export restrictions under the pressure of the US state. Such

practice emerged as a major opportunity for Korea, and the country scored a substantial growth

within the US market in the low-cost vehicle segment.

Phase 1 Phase 2 Phase 3

Phase 4

Cars produced

Ford Cortina

Pony

Excel

Accent

Technology mastered

Assembly technology Initial design technology

Deepening design technology Own design

Time period 1967–1976 1973–1985 1980–1994 1984–1995 Learning Stages

Preparation

Poaching experienced personnel, literature review, observation

tours

Literature review observation tour,

hiring foreign expatriates

Literature review observation tour

Poaching scientists literature review

Acquisition

Packaged technology transfer, hiring

foreign expatriates

Unpackaged technology transfer

Unpackaged technology transfer

Acquisition by research overseas

R&D, hiring foreign Expatriates

Assimilation research Learning by doing Learning by doing Learning by doing Learning by research

Improvement/Application Learning by doing Learning by doing Learning by doing Learning by research

19

After the development of the first own-design vehicle, Hyundai, the steam engine of the

Korean automotive industry, prioritized in-house R&D efforts. In particular, the R&D

investments towards the development of the engine technology played a decisive role in the

success of the catching-up strategy. What underlies the technological upgrading process achieved

by the Korean automotive industry under the leadership of Hyundai is the assignment of a great

deal of resources to R&D projects directed to a particular objective. Through its R&D project for

engine development, Hyundai managed to catch up with pioneer enterprises in the industry. At

the time the engine development project was inaugurated, the carburetor-based engine

technology was a standard in the world. However, across the awareness that the growing trend is

in favour of injection-based engine technology, the firm devised a R&D initiative oriented

towards developing this sophisticated engine. When this R&D project came up with success, the

then current engine technology gap between the pioneer enterprises of the sector could be closed

in a short time (Lee and Lim 2001).

By applying consistent, systematic and well-targeted interventions in the sector, and

implementing sector-specific exhaustive industrial policies, the state supported the learning

processes in the sector and ensured the internalization of the technology. For instance, when the

Asian Motor company suffered a financial trouble in 1976, the state induced pressure on KIA to

acquire this company with a view to pulling the latter out of the passenger cars market. Again

with a similar method, the state inhibited the collective investment scheme proposed between

Samsung and Chrysler. The strategic standing of the sector in favour of country's development

led to inhibition by state of the decisions of companies that would result in the deviation of long-

term development plans.

During the period of support, the Korean state and the officials of economy bureaucracy

collectively employed distinct policy instruments to convey the industry to long-term

development targets. Such policy practices were pursued and finalized along a particular sectoral

plan. Policies aimed at routing the sector are determined also by external global dynamics.

Nonetheless, in the Korean case, this situation has not caused a weakening administrative

capacity of the state. For instance, the Korean state put into play a scheme for the liberalization

of foreign trade scheme to kick off a trade war with USA. The officials of the Ministry of Trade

and Industry advised the firms on and preliminarily prepared them for the prospective

liberalization and deregulation period. In addition, triggered by liberalization in foreign trade in

1980s, the customs tariff rate of 200% on passenger vehicles was dropped below 15% in 1990s,

yet the conservation of domestic trade remained under conservation through non-tariff hurdles

against foreign luxury vehicles (Erdoğdu, 1999:65). In the Korean automotive industry

20

demonstrating a substantial enhancement through successful cooperation between the state and

private sector, overseas expansion speeded up in 1990s. Triggered by liberalization policies put

into play during this period, automotive firms financed their increased capacities through

borrowing, yet close state relationships with chebols accelerated the borrowing process. The

Asian crisis that broke out in 1997 severely impacted the sector. The industry again went into a

restructuring depending on mergers and acquisitions under tough conditions revealed by the

financial crisis. Hyundai acquired KIA experiencing financial issues followed by the acquisition

of Daewo Motor by US GM, changing its title into GM Korea. And Samsung Motor went into a

partnership with France's Renault (KAMA, 2011). Thanks to the acceleration brought into

existence by merger with Hyundai and Kia turned out to be the fourth biggest global

manufacturer and named to be a prestigious brand with its new vehicles of different segments

globally marketed. A prominent indicator of the success achieved by the automotive industry of

South Korea, Hyundai developed its own-design car and turned out to be a global car

manufacturer.

4.2. Turkish Automotive Industry: Development and Current Situation

During the industrialization process, the state intensively intervened in economy in Turkey

too. Through the protectionism and other macro-economic policy instruments applied

particularly during the period between 1960 and 1980 called as the import substitution

industrialization era, the state intervened in the resource allocation mechanism (Şenses, 1989).

However, like in the Latin American countries case, no performance criteria was sought in

incentives granted in Turkey. No private sector-public cooperation network that would be

capable of setting the balance between the short-term profit impulse of private sector and the

developmental state's long-term quest for financial development could be established, and profits

generated through interventions in resource allocation mechanism were shared in the private

sector depending on relationships with the political government (Öniş, 1992). Such disunity of

the state and the private sector, and autonomous nature of economy bureaucracy avoided guiding

the economy across long-term strategic targets. On the other hand, while state imposed customs

tariffs for the whole economy, it did not opt to implement an industrial policy targeting any

strategic sector, but pursued functional policies instead. With liberalization policies kicked off in

early 1980, the developmental state paradigm was abandoned and the neo-liberal policy set with

its genesis in the “Washington Consensus” was put into play instead. Weak incentive practices

far from catching up with the technological breakthrough prevailing around the globe and

targeted to sectors that might boost the international competitive edge exhibit the state's failure to

21

devise strategies and plans in line with development priorities (Atalay and Turan, 2003).

Industrial policies followed by the state were concentrated on the redistribution of profits

generated instead of focusing on learning dynamics that would elevate the technological skill

level. For this reason, private sector enterprises headed towards rant-seeking behaviors rather

than building strategies aimed at long-term technological transformation (Öniş, 1998). This

situation transformed the Turkish industry into a rather foreign-oriented state; culminating in the

fact that overall development of the country was guided by decisions taken by prominent firms of

pivotal developed countries. In other words, industrialization proposed by this model occurred in

the form of specialization in manufacturing industry activities abandoned by advanced countries

like in the “Product Life Cycle Theory” developed by Raymond Vernon (Vernon, 1963). In

1980s, Turkey became the production and export base of textile and garment industry

discontinued by developed countries, and then a automotive manufacturing and export base in

the second half of 1990s as a result of the fact that global enterprises shifted their manufacturing

processes within the automotive industry to developing countries. However, such

industrialization patterns taking place in Turkey appeared as a derivative result of new “division

of labour” processes occurring in the global manufacturing system rather than being a crop of the

domestic technological effort and national industrial policies. Following this industrialization

model, the Turkish automotive industry scored a progress in another development path of the

Korean automotive industry.

The Turkish automotive sector is one of the economy’s pioneering sectors. It is highly

international and around 76 percent of Turkish vehicle production in 2011 was exported, mainly

to Europe. Turkey produced 1,124,982 motor vehicles in 2010, ranking as the 7th largest

automotive producer in Europe; behind Germany (5,819,614), France (3,174,260), Spain

(2,770,435), the United Kingdom (1,648,388), Russia (1,508,358) and Italy (1,211,594),

respectively (AMA, 2011). There are currently 14 passenger and commercial vehicle

manufacturers in the country, in addition to two main tractor manufacturers. The total capacity of

the OSD members amounts to 1,561,155 vehicles as of 2010. These manufacturers, together with

the spare part producers, employ more than 265,000 people, ranking in the top 10 globally. The

four main producers are Ford Otosan (US; mainly Transit commercial vehicles); Oyak-Renault

(France;passenger cars only); Tofas, a joint-venture between Fiat (Italy) and the Koc Holding

conglomerate (mainly LCVs and also passenger cars); and Toyota (Japan; passenger cars). The

four main manufacturers accounted for approximately 88 percent of all vehicles manufactured in

Turkey in 2010.

22

Table 4: Auto Manufacturers in Turkey

Manufacturers The

Production Place

The year of

foundation

License for Production

Foreign Capital

(%)

Operation Type

Types of vehicles produced

A I O S Kocaeli 1966 Isuzu 29,74 JV Pick Up, Midi-Bus

ASKAM Kocaeli 1964 Hıno 0 License , trucks, LCV

B M C İzmir 1966 -- 0 License buses, trucks, MCV

FORD OTOSAN Kocaeli Eskişehir 1983 Ford 41 JV Passenger cars,

trucks, LCV HONDA TURKEY Kocaeli 1997 Honda 100 FDI Passenger cars

HYUNDAI ASSAN Kocaeli 1997 Hyundaı 70 JV Passenger cars, LCV

KARSAN Bursa 1966 Peugeot, Hyundaı 0 License buses, trucks, MCV

MAN TURKEY Ankara 1966 Man 99,9 FDI buses, trucks,

M BENZ TURKEY İstanbul 1968 Mercedes Benz 85 JV buses, trucks

OTOKAR Sakarya 1963 Deutz,Landrover 0 License buses, trucks, CDV,

OYAK RENAULT Bursa 1971 Renault 51 JV Passenger cars,

TEMSA Adana 1987 Temsa,Mıtsubıshı 0 License buses, trucks

FIAT TOFAŞ Bursa 1971 Fiat 37,8 JV Passenger cars ,CDV

TOYOTA Sakarya 1994 Toyota 100 FDI Passenger cars, buses, trucks

Source: Automotive Manufacturers Association (AMA)

In Turkey, the automotive sector started manufacturing in the midst of 1950s, and the

manufacturing process started to pick speed in midst 1960s. After the manufacturing of some

prototype vehicles in 1950s, the first assembly line was set up for the supply of jeep and pickup

trucks to armed forces in 1954, followed by truck and then bus assembly in 1955 and 1963

respectively, and assembly plants manufacturing passenger cars (Tofaş-Fiat, Oyak-Renault,

Otosan-Ford) started their fabrication activitie within the following three years (Demirer and

Aydoğan, 2006). In 1966, the automotive industry started the assembly of its own designs, and

the maiden domestic car of that period "Anadol" was manufactured by Otosan. Two major car

manufacturers, Tofaş and Oyak-Renault set up their manufacturing lines in 1971 under Italian

and French licenses respectively. At the beginning, an import substitution assembly industry was

23

at the focus. During this period, the domestic market was protected through high customs tariffs,

and great majority of the manufacture was devoted to the domestic market. While investments

grew the manufacturing capacity of the sector, firms involved in the subsidiary industry started to

manufacture the parts previously imported. The sector started overseas expansion in parallel to

the liberalization policies implemented in 1980s (Çetiner 1996). State support for the automotive

industry started to recede in the second half of 1970s. As a result of the abandonment of import

substitution policies in early 1980s and liberalization of the economy, state's role as a guiding

actor in economy started to decline. Industries failing to satisfactorily compete in parallel to the

abandonment of the developmental state paradigm in Turkish economy headed towards foreign

competition, and foreign trade rise in some labour-intensive sectors could only be ensured

through incentives. The market role started to rise versus the diminishing state role in resource

allocation, and the Turkish automotive industry was shaped not by long-term development

objectives but by strategic decisions of global own brand manufacturers in this framework

(Tuncel and Olmezogulları, 2011).

Number and production capacities of key industry firms displayed a consistent rise until

early 1990s thanks to a strong domestic trade. Through direct investments of global

manufacturers such as Toyota, Honda and Opel, the sector started to flourish. And prominent

enterprises such as Fiat, Renault and Ford started to acquire the shares of domestic key industry

firms. Starting with 1990s, export opportunities rose, yet the 1994 crisis led to a severe shrinkage

in the sector (Duruiz, 1999).

The period when the Turkish automotive sector started to become integrated with the global

manufacturing system commences with the execution of the Customs Union Convention in 1996.

As a result of the shrinking domestic demand due to the impact of the 1994 crisis, domestic

manufacturers started to head towards foreign markets (Mckınsey Global Institute, 2003). The

sector underwent a strategic transformation and an export-oriented strategy was kicked off.

Depending on this strategy, domestic manufacturers followed the global manufacturing system

and displayed a faster integration (Azcanli, 1995). Driven by the factors such as proximity to

Europe, export potential, qualified taskforce, the sector turned out to be the steam engine of

export today. Today, the key automotive industry hosts 18 firms. Almost all of these firms

manufacturing cars, light-weight commercial vehicles, heavy commercial vehicles, buses and

tractors perform under the license of a foreign giant.

Since the automotive industry was incorporated in the form of an assembly industry of the

global own brand manufacturers resident in Turkey, and as its progress took place along the path

designated by the initial conditions upon corporate structure, it set its sight on manufacturing

24

cheap and low-quality vehicles directed to the national domestic market instead of creating a

global brand. This vision led to the panorama that, as triggered by overseas expansion starting

with the second half of 1990s, the Turkish automotive industry manufacturing under the license

of global firms transformed into a manufacturing base shaped in line with the decisions taken by

these players instead of a global actor.

4. An Assessment of Technological Upgrading from the conceptual SSI Framework: S

Korea and Turkey The reasons underlying the deep difference between automotive industries of Korea and Turkey

with respect to their current progress worldwide will be analyzed by means of the model

developed around the sectoral innovation system. As mentioned earlier, the data infrastructure of

an industrial innovation system is made up of actors, networks and institutions. Besides this

composition, demand to the products of the industry also constitutes a major component of the

system. It is argued according to the multi-level approach suggested within the framework of the

study that, a technological upgrading process is determined by the sectoral system dynamics of

the industry concerned besides macro policy sets and strategic decisions of firms. As illustrated

in the Figure 3, the effect of policies in the technological upgrading process on sectoral level is

based on how efficient the innovation system is as an interface.

Each technological upgrading process will emerge from the interaction of supply and demand

(Xi et al. 2009). In the sectoral innovation system, demand should not be perceived merely as the

simple aggregate of the mass of consumers or similar buyers, but as the combination of

heterogeneous agents interacting with producers through different means (Malerba, 2006:391).

Therefore, it may be depicted as a factor that is both influenced by the policy and also routing the

technological development in the sector through effecting strategic decisions of the firms. The

supply side of the upgrading process is constituted by the growth of firms based on different set

of skills and resources. Macro policies and their meso-level influence channels have impact on

the technological skill build-up of the firms. Factors having impact on different development

performances of the Korean and Turkish automotive industry are summarized below across this

conceptual framework.

25

Figure 3: The conceptual SSI Framework of Technological Upgrading

Source: Prepared by utilization from Xi et al. 2009 and Tuncel & Olmezogulları, 2010

4.1. Sectoral Latecomer Strategies of S Korea and Turkey: Upgrading vs. Lock-in

The trend of the global automotive industry outside developed countries displays a shape that

may basically be discussed by two development path. While the first path involves countries

pursuing a successful strategy to catch up developed countries and turning out to be global

producers with their own proprietary brands ( for example S.Korea, and partially China and

India), the second path hosts countries abandoning the import substitution policies and

demonstrating the achievement of integrating its key industry set up in the form of joint ventures,

and the subsidiary industry surrounding it, into the global production system as a production base

(for example South Africa, Brazil, Turkey, Czech Republic). While the share of research and

development, and design in value added generated throughout the production process

consistently rises, the share of manufacture gradually shrinks. Therefore, those dominating the

processes of R&D, production of the idea, and design have the capability to deploy the

manufacturing phase of production in any segment of the world that best suits their interests. For

this reason, development orientation of the automotive industry in countries involved in the

second group is shaped based on strategical decisions of the global licensor giants.

Technological Upgrading

Technological Capability Building

Strategy

POLICY

Demand

Knowledge base Actors network Instutition

MESO LEVEL POLICY INTERFACE

Building Blocks of SSI

Global Value Chain

Dem

and

Side

Suply Side

26

While the South Korean automotive industry has turned out to be a prominent producer

running its own global brand, the Turkish automotive industry rather reveals a profile of being

the production base of global enterprises. The foremost reason underlying the Turkish

automotive industry's failure to display technological upgrading as successful as the South

Korean case is the lock-in dynamics of the path taken by the industry at the initial conditions

(organization and institutional structure).3

The Figure 4 comparatively illustrates the development paths respectively followed by the

Turkish and South Korean automotive industries. Of strategies discussed by Wong (1999), the

one studied within the context of development strategies for the Turkish automotive industry was

implemented by South Korea before, yielding a co-development of process and product

technology. Korean automotive industry has pursued the “Reverse Product Life Cycle Strategy”

as its development strategy. The root motive of this achievement should be explored in the

development policy pursued by that country. Instead of implementing policies as to the whole

economy, the state focused on strategic industries and implemented selective policies for

flourishing them. Support extended to major enterprises involved in the automotive industry

along this prospect has been decisive in the evolution of the industry. Like in the case of

Hyundai, the paramount enterprise of the Korean automotive industry today, major licensor firms

start manufacturing through mimicking across the vision of developing their own cars rather than

standing as installers. Driven by the technological capability background supported by local

technological efforts, the firms managed to start developing their own designs. Throughout this

period, the state has intervened in the market and assumed a regulating and guiding role across

long-term development objectives of the industry.

On the other hand, the Turkish automotive industry has pursued the "Reverse Value Chain

Strategy" as its development strategy. It is obvious that, rather than being a designed preference,

this represents a development process dependent upon the path shaped by initial conditions

Major firms of the Turkish automotive industry were set up through license contracts and started

their initial operations on a limited facility scale in line with import substitution policies.

Through means of conservation provided by the state, a subsidiary industry surrounding the main

industry appeared with a view to nationalizing the inputs employed in production. The subsidiary

industry starting to flourish kept running on an inferior scale and at a low technological level.

3 All development paths which have path dependent features, relate beginnings condition of system. For instance if a firm (or group of firm) select a specific innovation or technological upgrading path at the beginning, it may utilize some advantages (first mover) and achieve upgrading. Because of organizational and instructional conditions, the others may choose different development path. On the other hand, both group risk being lock-in to these specifics path through various self-reinforcing effects (Fagerberg, 2006).

27

While such inferior scale narrowed down the practical means of technology, it has constituted a

barrier to the local technological endeavour. In particular, the common behaviour of firms to start

producing through license contracts paved the way for foreign-source dependency in terms of

technology that is also experienced as a trouble today. Assembly companies set up first displayed

a development on process engineering. And these firms turned out to be thriving manufacturers

based on process improvements. In harmony with global trends, they started to target high-

quality production starting with the second half of 1980s. And 1990s became the starting era of

comprehensive efforts involving product development and design processes. The firms started to

reveal a composition where technical departments sprout R&D units, R&D staff is employed and

R&D projects are created. Major licensor industries have supported this process as the presence

of surrounding manufacturers with the capability of modifying designed products would drop

down their costs (Tuncel and Olmezogulları, 2010. While firms, standing as high-quality

manufacturers on one side, have turned out to be the major manufacturer and exporter of

particular product ranges of licensor enterprises, they have also constituted the part of design and

test processes associated with these products. Surrounding firms have started to get articulated

into the design processes of licensor enterprises as a co-designer. However, they keep dependent

to the major enterprise for technology development, R&D project design and setting of supply

policies. Therefore, they have no opportunity to reach the "Own Brand Manufacturing (OBM)"

phase that constitutes the final step of the development strategy. They rather keep locked in as a

co-designer at the manufacturing phase, the second step along this path. In particular,

manufacturing of complicated systems such as motors, gearboxes etc. reveals a higher degree of

dependency (Akarsoy.

Current development level and upgrading possibilities of the automotive industry in Turkey

should be assessed individually for each different vehicle segment. The development process for

the manufacturing of passenger cars seems locked in at phase B. Switch to brand manufacturing

appears impossible. Today, neither Turkey nor any other country has the chance of brand

manufacturing, particularly as much as passenger cars are concerned. Therefore, resource

planning should be focussed on higher added values, particularly in favour of R&D design and

associated activities. From this point of view, Turkey has the potential to exceed its standing as a

production and export base and turn out to be a design and R&D venue. Enhancing testing means

and elevating R&D investments in this process would reinforce the standing of passenger vehicle

manufacturers as an “Original Co-Designer Manufacturer”. On the other hand, the bus and truck

segment promises a development path deep into further stages. This field hosts both set of firms

manufacturing under contract and operating on 100% domestic capital. Turkey has attained a

28

very crucial standing in global bus manufacturing arena, and has its own designs in this segment.

In particular, domestically-financed firms have taken major steps towards branding. There are

two potential upgrading paths for this segment:

The first one is the path from phase B to C1. This is a potential route rather for firms

manufacturing under contract. At this stage, the firm produces its own design, introduces the

vehicle as an idea, but markets its product under the brand of the licensor. A major restriction

along this path is the set of barriers to the elevation of the nationalization rate. In an aura where

motors and gearboxes are imported, it seems unlikely for firms to upgrade to "Original Idea

Manufacturers (OIM)". However, there are fully Turkish-design diesel motors for use in heavy

commercial vehicles (trucks and trailers) segment4. These firms need to lay emphasis on co-

design efforts with domestic suppliers capable of manufacturing technology-intensive systems

besides design processes. The second path is the one from phase B to C2 that is the own brand

manufacturing phase. This route appears possible for domestically-financed own brand

manufacturers. In particular, Turkey displays this potential for the bus and minibus segment. The

design and branding process is coming up with success.

Figure 4: Upgrading Strategies vs. Lock-in Dynamics of Automotive Industry in Turkey and South Korea

Source: Author

4 “Ecotorq” developed by Ford Otosan is the maiden diesel engine of Turkey designed from the scratch. The project was run in cooperation with Robert Bosch and Australia's AVL.

A OEM

C2 OBM

B ODM

OCDM

C1 OIM

Process Technology Capability

Product Technology Capability

H,igh

High

Low

1. Reverse Value Chain Strategy

2. Reverse Product Life Cycle Strategy

S Korean Automotive

Industry: Upgrading path and Catching-up Strategy

Turkish Automotive Industry: Upgrading

Opportunities and Lock in Dynamics

29

Main automotive companies of Turkey have gained competence in conformity assessment

(quality, standards, documentation, accreditation, etc.) (Çakar, 2007). However, it is unlikely to

argue the same for the capability of developing future technologies on product basis. Such firms,

which are failing to conceive the foreign main shareholder as the resource of the technological

know-how and mobilize the in-house R&D process or universities in the country as know-how

resources, have remained incapable of producing product technologies (Tuncel and Taşkın,

2007). To overcome the lock-in prevailing in abovementioned segments, the industry needs a

strategic move that the state will support through selective policies. However, it should be noted

that, the Lisbon Strategy, shaping the general framework of EU technology policies that Turkey

has to pursue on account of the current EU accession process, constitutes the utmost institutional

barrier to implementing such sort of selective policies (Soyak, 2005).

4.2. Tecnological Capability Building and Characteristics of the Technological Regime:

The automotive sector carries the technological regime characteristics of the Schumpeterian

Mark II model. The sector has high level of cumulativeness on firm level, systematic information

structure based on implicit knowledge, high appropriability conditions and opportunity

conditions at medium depth. Technological skill build-up in the sector takes place based on the

dynamics of these technological regime characteristics. The automotive sector also stands as an

industry where learning by doing, using and interacting has an impact on innovation. Therefore,

developing the learning processes within the firm and build-up of the firm-specific "know-how"

is of crucial essence. This in turn leads to concentration of innovation in geographical terms.

Coordination and management of implicit and codified knowledge within a system at different

levels raises the significance of spatial proximity. Efficient transfer of system-specific knowledge

becomes dependent upon relationships where face-to-face interactions come to the foreground

and proximity between moments grows.

The Korean state has systematically supported industry since the establishment of the

automotive industry. The industry was safeguarded by tariffs for the sake of bringing competitive

advantages in the sector. Additionally, the state intervened in the market to regulate the market

structure. This intervention was aimed at resolving issues hindering the development such as

limited scale and excess capacity. Operation of big-scale firms of the automotive sector within a

marginally competitive environment has accelerated technological learning processes elicited by

scale advantages. Existence of several financially-sound firms in the sector has contributed to the

creation of resources that may be allocated to in-house R&D processes. Internalization of

technology and developing technologies internalized through R&D expenditures has contributed

30

to collective development of product and process technologies of high-scale enterprises engaged

in the sector like Hyundai. Being initially oriented in domestic market, industry successfully

opened up into foreign markets through the technological skill build-up gained in the process of

time. In the automotive sector, transfer of the implicit knowledge build-up is crucial for the

innovation process. By landing staff with high field experience from foreign enterprises, Hyundai

contributed to its own knowledge build-up process. Supporting cooperation efforts between the

key and subsidiary industry has speeded up knowledge transfer between the parent company and

its suppliers. As a consequence, the country managed to implement a more appropriate policy set

capable of contributing to the innovation process in line with the technological regime

particularities of the automotive industry. Such appropriate policies have speeded up the build-up

of technological capability in the sector.

On the other hand, demonstrating a growth starting with the second half of 1960s, the Turkish

automotive sector was set up as an assembly industry aimed at meeting the domestic car demand

thanks to the customs shield brought up by the import substitution period. Domestic enterprises

such as Oyak Renault, Tofaş, Otosan appearing on the stage under the license of global own

brand manufacturers prioritized the development of manufacturing processes. And this priority

has accelerated know-how build-up in the sector. Considering the fact that new entries in the

global industry are fairly limited, the common behaviour of running the firms incorporated in

Turkey as a joint venture has prevented these firms to become independent and build new brands

like contrary to the Hyundai case. Turkish firms setting up their manufacturing in reliance to the

old production lines and moulds of central countries experienced the issue of undercapacity due

to weakness in domestic demand, and could not duly benefit from the learning processes, the

decisive factor of technological development in the sector. For this reason, the sector faced a low

productivity level and poor product quality (Ansal, 1990). Dependence of Turkish firms to

foreign partners prevented these firms from carrying out independent research and development

projects, remaining as a major barrier to technological upgrading.

4.3. Actors and Network:

While the innovation process takes place locally within the firm, non-firm actors and

relationships built by firms with these actors have a critical influence in this process as well.

Non-firm actors that we can classify as universities, public institutions, research organizations,

industrial societies and business associations constitute, integrally with the firm, the components

of the sectoral innovation system. Particularly public authorities in charge of regulating the

31

sector, and specialists of these authorities have a major influence on the sectoral development

process. The Korean state has regulated the automotive sector, to which it attached strategical

priority, through sectoral plans. Networks built between the sate and private sector to route

economy across development objectives performed very well. Along with their specialized

bureaucracies, public organizations such as the "Economic Planning Board", "Ministry of Trade

and Industry" were in charge of elaborating and enforcing the industrial policies of public

organizations. These organizations played principal role in equipping the sector with competitive

edges through a disciplined and performance-based incentive system. Particularly in 1980s,

enhancement of design capabilities became decisive in setting the right move of the Korean

automotive industry to foreign marketplaces. Close relationships built with actors such as

universities and research organizations at this phase

In Turkey, "State Planning Organization" became the chief actor of economy particularly during

the import substitution industry period pursued between 1960 and 1980. Like the planning

institution in the Korean case, this institution did not have the sufficient autonomy, and employed

policy instruments towards whole industry instead of sectoral policies. Lack of a certain

technological policy prevented the sector from producing a technological skill build-up. Actors

such as societies and chambers involved in the sector acted as an interest group particularly in

sharing the profits yielded by tariff protection. The sector could not carry out thriving

cooperation activities with institutions such as universities. As a matter of fact, the Turkish

automotive firms could not carry out a serious research and development activity until the second

half of 1990s. Efforts for product and process technology development could be initiated only in

late 1990s through the support of parent companies. Even today, long-term research

collaborations built with universities and research institutions are quite weak.

4.5. Institutions:

Institutions are limitations introduced by people to shape interactions between them, and they

constitute a framework for these interactions. Institutions may have sectoral identity as well as a

national one. Patent system, financial institutions, education system, labour markets and

conducting business culture are major institutions of an economy. The automotive sector also

stands as an industry where learning by doing, using and interacting has an impact on innovation.

Therefore, developing the learning processes within the firm and build-up of the firm-specific

"know-how" is of crucial essence. For this reason, to elevate the "assimilation capacity" that is

decisive in the learning process, engineers specialized in automotive technologies and

intermediate staff trained on automotive manufacturing should be recruited. In the automotive

32

industry, particularly privatized labour markets and educational institutions play a very critical

role. Through well-done educational schemes, Korea could create a labour market consisting of

specialized engineers to be employed in the sector. Additionally, forms of doing business based

on mutual trust reduce costs of operation and yield substantial economical gains. Existence of

major family enterprises engaged in distinctive business fields has been of crucial essence in a

flourishing Korean automotive industry. Both in acquiring and learning new technologies, and

thanks to its impact channels, chaebols became influential in the process of overseas expansion.

A very significant factor for such sort of collaborative activities, trust has a vital place between

firms. Trust factor stands as a crucial illustrative factor particularly in social network topology

analyses. In ensuring a successful economical up growth in Asian countries, Confucius highlights

the factor of trust based on primary relationships introduced by religion (Fukuyama, 1995). State

support for strategic sectors has been the driving power of technological breakthrough in an aura

where institution such as venture capital is underdeveloped.

In Turkey, creation of labour markets suiting both occupational training and sector has failed.

Particularly through liberalization policies implemented after 1980s, state's weight on economy

diminished, and market became the decisive mechanism entirely in resource allocation. Lack of

institutions suitable for the technology finance, poor state incentive mechanisms and paucity of

resources hampered technological growth. On the other hand, both the state-private sector

collaboration and the internal cooperation within the private sector stagnated due to the failure of

creating networks in the business conduct culture. Like in the Korean case, this condition

obstructed the formation of catalyst interfaces.

4.6. Demand: As to Korea, the country set its sight on overseas expansion in the automotive industry that it has

considered to be a strategic sector from the very beginning. Poor domestic demand in Korea

designated vehicle manufacturers as an export-priority strategy for the sake of utilizing scale

advantages. Deep shrinkage of the domestic market caused by loss of profit due to the second

oil crisis accelerated the overseas expansion process. Facilitated by state support, Korean firms

started to market products to international markets in 1975. Manufacturing cheap and poor-

quality vehicles during the initial period, the industry managed to penetrate into the markets of

particularly underdeveloped countries through low-price policy. Starting with early 1980s,

Hyundai managed to penetrate into the US market. Aspiration to build cars meeting the demands

of consumers in the US market speeded up the technological breakthrough of the company.

Starting with 1990s, export was directed to new marketplaces such as Europe, Middle East and

33

South Africa driven by shrinkage in the US market. Particularly triggered by the overseas

expansion process, the strong demand factor became a decisive factor in the development

perspective of the Korean automotive industry.

Starting with the incorporation period, the Turkish automotive industry set its sight on

manufacturing towards the domestic market safeguarded by customs tariffs. Due to insufficient

demand from the isolated domestic market, optimal plant scales could not be built and therefore

scale advantages could not be availed of. Since domestic manufacturers have inferior income

levels, cost effectiveness came to the foreground as a product preference criterion, pushing the

quality criteria into the background. Due to the paucity of competitive edges gained, the period of

overseas expansion for the industry was delayed. Under isolated domestic market conditions,

current firms acquired the obtained the licenses of foreign brands and opted for remanufacturing

their old models for the domestic market. Starting with the second half of 1990s, the sector

displayed a rapid overseas expansion and enhanced means of export. In parallel to the economic

growth, the domestic market also enjoyed an expansion, yet the Customs Union Convention

executed with the European Union in 1995 paved the way for an intense inflow of import

vehicles into the domestic market. This condition caused an augmented import penetration rate of

industry. And this stands as a major issue for the Turkish automotive sector. On the other hand,

in the vehicle segment particularly where the design capabilities of Turkey are developed, strong

international demand originating from Middle Eastern markets highly contributed to the up

growth of the sector. Foreign demand is of great essence in terms of the sector's standing in

economy for Turkey, being the manufacturing base of global brands in the passenger car

segment. 5. Conclusion: The assessment of the set-up and evolution of and current progress attained by the South Korean

and Turkish automotive industries reveals that, despite similar prevailing conditions at the start

up, the efforts for establishing these two distinctive industries displayed varied performances due

to factors having influence at macro, micro and meso level. Decisive factors in the outcome are

different industrialization strategies pursued by these two countries, distinctive international

standings, different industry policy sets implemented and difference in the administrative

capacity of these states. This study focuses particularly on the dynamics of meso level, rather

ignored to date in discussing the late industrialization process. Since each sector has different

development dynamics, they need to be supported by different policy sets. This approach also

contributes to considering how selective policies should be designed. Of course, all technological

34

development processes contain a margin of uncertainty, making it impossible to seamlessly

manage the whole process by means of policy instruments. And some random events may cause

permanent lock-ins on this technological development process. However, it should be noted that,

all efforts for technological development are the outcome of human actions for a deliberative

purpose. And each potential action set meant to guide a process is designed to attain particular

purposes.5 And realization channels of this design, links and all actors involved in this process

constitute the social, economical and institutional background of the industrialization process.

Historical consideration of the matter reveals that all successful moves for economical

development have owed to the combination of right policies with right institutions (Chang,

2002). Technology is not merely a practical know-how transforming inputs to outputs in a

manufacturing process. Conceptualizing technology in a holistic approach would better enlighten

the aspects of technology contributing to the quantitative and qualitative transformation of an

economy. This framework also stresses the capacity of right policies and institutions to manage

technological developments in a totalitarian approach. As highlighted by Richard Nelson, besides

the change in physical technologies during economical development, other decisive factor is

social technologies evolving along physical technologies. Social technology is defined as forms

of human interactions unlike physical engineering technologies (Langlois, 2007:6). These links

and interaction channels appear as policy interfaces shaping the developmental direction of the

system. Examining both country experiences from a comparative point of view, it can be

observed that Korea, actively implementing the industrial policy interface across the

technological upgrading strategy, outperforms Turkey. While the Korean industry has turned out

to be a own brand manufacturing sector exporting vehicles to the whole world, the Turkish

automotive industry acquired a standing as an assembly base functioning under the license of

global enterprises that are own brand manufacturers. Despite a particular achievement for

different vehicle segments (buses, midibuses), Turkey much falls behind Korea in terms of the

current progress attained in this industry.

5 For example, Brain Arthur points out that the technology relate to human purpose. “I will define a technology quite simply as a means to fulfill a human purpose. The purpose may be explicit; or it may be hazy, multiple, and changing. But whether its purpose is well defined or not, a technology is a means to carrying out a purpose” (Arthur, 2007:276).

35

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